Corporate banking—risk management, regulatory and reporting framework in India: a Blockchain application-based approach

There has been a substantial build-up of non-performing assets in the Indian banking sector. Despite multiple initiatives and regulatory changes, there is a need to revisit the reporting and regulatory frameworks and redefine the focus areas. Banks credit problem has often been explored under the lens of asymmetric information. Spreads are generally directly proportional to probability of default and an inverse function of collateral and security. However, in India, there is a noticeable gap in academic literature to suggest robust institutional reforms to address the twin curse of adverse selection and moral hazard. Regulatory frameworks, particularly with respect to risk management function of banks, also grapple with predicting forthcoming disruptions. As banks redesign their corporate customer experience on a digitalized scale, leveraging large-scale available data, there is a bigger challenge to the regulator to ensure risk regulations are effective and save costs as well. The authors suggest that if information asymmetry exists, the blockchain protocols may mitigate uncertainty. Though blockchain technology has been leveraged to increase effectiveness of certain corporate banking products, the originality of the paper lies in coming out with a detailed framework for the possible use of blockchain (a distributed ledger based technology) for credit decisions, timely generation of red-flags and tightening the regulatory framework. The paper also lists down suggestions to improve the enabling regulatory and reporting architecture using regulatory technology (RegTech) to support unification of data already available in the banking system. This will improve the quality of information available to the lenders and enable them to take more informed credit decisions (data-driven finance), while granting and monitoring loans. Ultimately, it will lead to an optimization of credit risk capital.